From the following information you are required to calculate: i) P/V ratio ii) Fixed Cost iii) BEP (Sales) iv) Margin of safety for period 1

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Understand the Problem

The question is asking to calculate four financial metrics based on the provided sales and profit data for two periods, along with additional budgeted expenses at a specified production capacity.

Answer

i) P/V Ratio: $91\%$ ii) Fixed Cost: $₹0$ iii) BEP (Sales): $₹0$ iv) Margin of Safety for Period 1: $₹1,00,000$
Answer for screen readers

i) P/V Ratio: 91%
ii) Fixed Cost: ₹0
iii) BEP (Sales): ₹0
iv) Margin of Safety for Period 1: ₹1,00,000

Steps to Solve

  1. Calculate the Contribution Margin Contribution margin can be calculated for both periods using the formula: $$ \text{Contribution} = \text{Sales} - \text{Profit} $$

    • For Period 1: $$ \text{Contribution}_1 = 1,00,000 - 9,000 = 91,000 $$
    • For Period 2: $$ \text{Contribution}_2 = 1,50,000 - 14,000 = 1,36,000 $$
  2. Determine the P/V Ratio The P/V (Profit-Volume) ratio is calculated using the formula: $$ \text{P/V Ratio} = \frac{\text{Contribution}}{\text{Sales}} \times 100 $$

    • For Period 1: $$ \text{P/V Ratio}_1 = \frac{91,000}{1,00,000} \times 100 = 91% $$
    • For Period 2: $$ \text{P/V Ratio}_2 = \frac{1,36,000}{1,50,000} \times 100 = 90.67% $$
  3. Calculate Fixed Cost Fixed costs can be derived using the contribution margin and profit. Fixed cost is constant across periods: $$ \text{Fixed Cost} = \text{Sales} - \text{Contribution} - \text{Profit} $$

    • Using Period 1: $$ \text{Fixed Cost} = 1,00,000 - 91,000 - 9,000 = 0 $$
  4. Calculate Break-Even Point (BEP) in Sales BEP in sales can be calculated using the formula: $$ \text{BEP Sales} = \frac{\text{Fixed Cost}}{\text{P/V Ratio}} $$ Since the fixed cost is 0, $$ \text{BEP Sales} = \frac{0}{0.91} = 0 $$

  5. Calculate Margin of Safety for Period 1 Margin of Safety is calculated as follows: $$ \text{Margin of Safety} = \text{Actual Sales} - \text{BEP Sales} $$ Thus, $$ \text{Margin of Safety} = 1,00,000 - 0 = 1,00,000 $$

i) P/V Ratio: 91%
ii) Fixed Cost: ₹0
iii) BEP (Sales): ₹0
iv) Margin of Safety for Period 1: ₹1,00,000

More Information

The calculations show that with no fixed costs, all sales contribute directly to profit. A high margin of safety indicates a strong buffer against losses.

Tips

  • Forgetting to apply the formulas correctly: Ensure all values are substituted in the right formula.
  • Miscalculating fixed costs: Fixed costs shouldn't be assumed as zero without proper calculations from contribution and profit.

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